Euro-Area Inflation Accelerates to 1.6% Amid Recession

By Marcus Bensasson -
Jul 2, 2013

Euro-area inflation accelerated for a
second month in June and manufacturing output contracted less
than estimated, adding to signs that the 17-nation currency bloc
is starting to emerge from a record-long recession.

The annual inflation rate rose to 1.6 percent from 1.4
percent in May, the European Union’s statistics office in
Luxembourg said in a preliminary estimate today. That’s in line
with the median of 40 economists’ estimates in a Bloomberg News
survey. The rate has been below the European Central Bank’s 2
percent ceiling for five months.

A gauge of manufacturing in the euro area increased to a
16-month high of 48.8 in June, London-based Markit Economics
said today. Still, the gauge has been below 50, indicating
contraction, since July 2011. The jobless rate increased to a
record 12.2 percent in May, a separate Eurostat report showed.

“It’s a good news day extending the cyclical improvement
trend we’ve seen in the past three months,” Frederik Ducrozet,
an economist at Credit Agricole SA (ACA), said by telephone from
Paris. “We’re not out of the woods looking at the job numbers,
and it’s not necessarily having an impact on the market because
positioning flows dominate.”

Today’s inflation and manufacturing data followed an
encouraging euro-zone economic confidence report for June that
showed sentiment at its highest level for a year. The 17-nation
economy’s 18-month recession probably ended in the second
quarter, as the economy stagnated before returning to growth in
the following three months, according to another Bloomberg
survey of economists.

Monetary Policy

The ECB’s Governing Council will keep its benchmark rate
unchanged at a record low of 0.5 percent when it meets on July
4, according to the median of 62 economists’ estimates in a
separate Bloomberg survey. President Mario Draghi said last week
that policy makers stand ready to act to support economic
growth.

The ECB’s monetary policy “will stay accommodative for the
foreseeable future,” Draghi said. “We have an open mind about
all other possible instruments that we may consider proper to
adopt.”

The inflation rate was driven higher by energy prices,
which increased 1.6 percent in June after a 0.2 percent decline
a month earlier, today’s report showed. Prices of food, alcohol
and tobacco rose 3.2 percent, while the cost of services
increased 1.4 percent.

‘Low Inflation’

“There’s no doubt that the low inflation right now is
something the ECB likes,” said Marco Valli, chief euro-area
economist at UniCredit Global Research in Milan. “Inflation has
slowed down quite dramatically, and this is good for the
purchasing power of households. Low inflation at this stage is
good for growth and is good for competitiveness in the
periphery.”

Markit’s euro-zone manufacturing gauge, based on a survey
of purchasing managers, showed improvement in all countries
except Germany.

“Manufacturing is showing welcome signs of stabilizing,”
Chris Williamson, chief economist at Markit, said in the report.
“Both output and new orders barely fell during June, and on
this trajectory a return to growth for the sector is on the
cards for the third quarter.”

Airbus SAS last month announced an order for 35 A350-1000
planes from United Airlines after the U.S. carrier converted 25
commitments for the -900 version of the aircraft to the larger
model and agreed to buy 10 additional jets.

Youth Unemployment

Avions de Transport Regional, the world’s largest maker of
turboprop airliners, has already eclipsed its 2013 target for
firm orders as purchases from lessors helped swell its backlog
to a record $6.5 billion, the company said last month.

Yet unemployment in the euro area continues to edge higher,
as governments across the bloc cut spending. The number of
jobless people rose to 19.3 million in May, up 67,000 from the
previous month. Youth unemployment was at 23.9 percent. The
jobless rate in Germany, Europe’s largest economy, fell to 5.3
percent, while Spain had the highest May rate at 26.9 percent.

“Given the ongoing recession and sluggish economic
outlook, it is likely that even higher peaks will be reached in
the months ahead,” Bert Colijn, a labor-market economist with
The Conference Board, said in an e-mailed statement. “With
unemployment still rising in Spain, Greece, and Italy, one would
expect a sharp increase in migration to better performing
countries like Germany and the U.K.”